Orange Countyith radio ads still pitching potential borrowers, Wesley Hoaglund, owner of Lenox Financial Mortgage Corp. in Irvine, is hoping to survive a market where the number of home loans being made is about half of what it was a year ago.
“We’re hoping to make it through the storm,” Hoaglund said.
Mortgage brokers—middlemen who generate loans funded by banks and other financiers—have seen a big chunk of their business go away in the past year. Some wonder if they’ll survive the downturn.
Subprime and Alt-A loans to borrowers with poor or imperfect credit? All but gone. Jumbo loans worth more than $417,000? A fraction of what they used to be.
What’s left for mortgage brokers largely are vanilla loans—mortgages of less than $417,000 to borrowers with good credit. They’re known as “conforming loans” because they meet guidelines set by the government-backed funds of Fannie Mae and Freddie Mac.
But conforming loans are the least profitable for brokers, prompting some to wonder if they can generate enough in fees to cover their costs.
The mortgage brokering business, which just a year ago was chirping with ads everywhere from billboards to annoying phone calls, has gone cold.
Demand Still There
Brokers say it’s not for lack of demand for subprime, jumbo and other loans. Earlier this month, mortgage applications surged to a four-year high on lowered interest rates, according to the Washington, D.C.-based Mortgage Bankers Association.
But lenders’ appetite for loans has dried up, brokers say, as banks and others see losses from risky mortgages made during the boom.
And things are likely to get worse before they get better. Bad subprime loans are forecast to plague lenders with defaults through 2008.
That has economists expecting more job losses for mortgage brokers. No one knows for sure how many people work as mortgage brokers locally, though the county has been a hub for the business.
Last year, 135,780 people here worked in the finance sector, which includes mortgage brokers. This year, that’s expected to be down 2%, or by about 3,000 jobs, with mortgage brokers presumed to lead the drop, according to Chapman University economist Esmael Adibi.
The finance sector’s recent peak was at 139,000 jobs in 2006.
Loans at Lenox are down 60% from a year earlier, according to Hoaglund.
And subprime loans that once made up about a quarter of his business have stalled to practically none, he said.
He’s cut his staff by about 40% to less than 100 workers. Hoaglund also has cut his advertising budget in half.
Started Himself
Eight years ago, Hoaglund said he started Lenox by himself from a 10-foot by 10-foot office.
Lenox grew with a rising tide in mortgages, expanding its business to 35 states. Hoaglund said he hopes his geographic diversity will help keep the business alive.
The company lines up loans for banks and also does some lending itself. That makes foreclosures an issue for Lenox, he said.
Lenox hasn’t seen many foreclosures, Hoaglund said. But it recently foreclosed on a Moreno Valley home for which the borrower didn’t even make the first payment, he said.
The house that initially sold for $460,000 has been declining in value and was last listed at $250,000, he said.
After paying real estate agent fees, the house could bring a loss of about $150,000, he said.
Like Hoaglund, mortgage broker Jim Walter had about a quarter of his business from people with less than great credit.
Walter, a 25-year veteran of the business, said he sees the credit collapse as a badly needed cleansing of brokers who helped fuel the mortgage bubble.
“I’m glad we’re getting rid of a lot of riffraff,” said Walter, who runs Anaheim’s Mortgage Plan.
His office building once housed two other mortgage businesses that recently went under, Walter said.
There’s still a lot of demand from borrowers but lenders have become ultra-conservative, he said.
“It’s not an issue of not enough clients,” Walter said.
Walter still does subprime loans. But they’re merely 5% of his business and only made to people willing to put their own money into a home, he said.
The Federal Housing Authority now requires borrowers to put up at least 5% of a loan’s value, according to Walter.
About 40% of Walter’s business now comes from loans for commercial real estate, which is feared to be the next area to see a downturn.
Through the years, the mortgage business became complicated with elaborate deals involving low teaser rates and other creative financing, according to Walter. A combination of cheap money and greedy brokers led to unqualified people getting loans, he said.
“When I first started in the business it was simpler and stable,” he said. “It was harder to get a loan.”
Simpler Days
The business now is reverting back to its simpler days, according to Walter.
Mortgage Plan didn’t make loans for more than the value of a house, as some other brokers did, Walter said.
It still does some stated income loans, where borrowers state their income and don’t back it up with documentation. But rates are higher and borrowers have to put in 30% of their own money, up from 20% a year earlier, Walter said.
Things are returning to the way they were when loans were denied to people who couldn’t afford them, Walter said.
A December survey by the California Association of Mortgage Brokers found that 59% of mortgage brokers queried said it would be harder to get a loan this year.
Fresno BeeUnemployment jumped to three-year highs across the central San Joaquin Valley in December, new statistics show -- just as economists worried that the region may be leading the country into recession.
Fresno County unemployment rose to 9.9% in December, up from 8% in December 2006, the state Employment Development Department reported Friday. That marks the highest December level since 2004, when the jobless rate was 10.3%.
The poor jobs picture was echoed in Kings, Merced and Tulare counties, all of which posted double-digit unemployment rates also not matched since 2004, the department reported.
And California as a whole saw jobless rates climb to a seasonally adjusted rate of 6.1% in December, up from 4.8% in December 2006 and the worst showing since September 2003.
The state's economic picture was severe enough to prompt Gov. Schwarzenegger on Friday to ask state agencies and departments to speed the release of $29 billion in unallocated funds from the 2006 infrastructure bonds, as well as about $500 million authorized for roads and levee projects.
"Speeding up construction of roads, schools and levee repairs will help our economy continue to grow and keep more people working," Schwarzenegger said.
Nationwide, job growth has stalled and unemployment climbed in recent months as the bursting housing bubble and meltdown in the subprime mortgage and credit markets have forced economists and politicians to consider ways to combat what may be the start of a nationwide recession.
But December's jobless numbers indicate that the Central Valley, home to some of the cities worst hit by the housing foreclosure crisis, may already be in recession, said Sharmila King, economics professor at University of the Pacific in Stockton.
"With housing, you can say that the Central Valley is the epicenter of the problem, and that's reverberating across the economy," King said.
"We're quite literally on the brink of a recession -- if not in a recession already -- in the Central Valley."
That worry has been echoed by such figures as John Stumpf, president of Wells Fargo & Co., and Steve Cochrane, senior managing director of Moodys.com.
Both said in recent months that the Central Valley may be entering a recession, officially defined as two consecutive quarters of economic contraction.
Lauren Addison of Clovis was laid off in October from her job as an administrative assistant at an engineering firm.
And she said Friday that she was an escrow officer for 17 years before that, but can't fall back on that job right now.
"I'm about out of money," she said. "It's tough out there."
Max Terronez of Fresno estimated he has sent out 80 resumes since he was laid off Nov. 2.
He sold radio ads for Clear Channel Communications Inc.
"It's been a difficult, long haul in Fresno," he said.
With fewer new homes come fewer jobs -- a particularly hard hit to the Valley, where construction jobs helped drive regional unemployment rates to decades-long lows in 2005 and 2006.
In Fresno County, construction employment has remained flat over the past 12 months.
Over the same time, Tulare County has lost 400 construction jobs, a 5% decline, and Madera and Kings counties also have seen construction job losses.
While Fresno hasn't suffered as badly from the housing downturn and wave of foreclosures as cities like Stockton, Modesto and Sacramento, it still has seen home prices fall at a rate of about 1% per month over the last year, and Fresno is No. 14 on the list of American cities with the highest rates of foreclosures per capita.
That also has led to layoffs in the real estate and mortgage lending industries, all part of professional and business services.
In those sectors, job growth has stalled in Fresno and Madera counties and fallen steeply in Tulare County since December 2006.
King warned that, because home building and related financial services have been a key economic growth engine, their breakdown is likely to hurt the region more than others less dependent on the housing market.
"The whole subprime mortgage crisis is already starting to spread," she said. "If you get laid off from work, you won't have income, and that will spin over to the retail area. The next problem would be job losses in retail trade."
California as a whole has seen retail employment fall from 2006 to 2007 at a rate exceeded only by the even harder-hit finance and construction sectors.
So far, that weakness hasn't shown up in Fresno County, where retailers added 1,300 jobs, an increase of 3.6%, between December 2006 and last month.
But in Tulare County, retailers marked a loss of 300 retail jobs, down 1.8%, in the same period.
And Pam Lasseter, assistant director of the Fresno County Workforce Investment Board, said it's likely that consumers faced with stagnant wages and rising prices of food and gasoline will find it harder to keep up the spending needed to keep the retail sector growing.
"The man on the street says he can't afford the price of gas ... the price of food going up," she said. Across the country, consumer prices rose in 2007 at the fastest rate in 17 years, driven by rising food and gasoline prices.
At the same time, the earnings of the median U.S. worker fell 0.9% in 2007 when adjusted for inflation, the fourth loss of earning power recorded in the past five years, as the richest Americans continue to capture almost all of the gains of the most recent economic expansion.
"If they can't afford to buy, that's putting pressure on retailers," Lasseter said. "What can they do? They have to lay off people."
California's overall economic picture is further clouded by a state budget shortfall estimated at $14 billion, as the bursting housing market has reduced tax revenues. Schwarzenegger has proposed across-the-board cuts to state services such as schools and prisons -- worrisome to a Central Valley where government makes up a substantial and fast-growing portion of the employment base.
"That's going to be a concern for local governments," King said. "Still, education is somewhat insulated from a recession. Kids still need to go to school."
At the national level, President Bush urged Congress to pass about $145 billion in tax relief and other incentives aimed at putting money in consumers' pockets and bolstering the weakening economy.
